Vietnam lines prized M&A assets up along the bar

Investors hope a renewed privatisation and anti-corruption drive will finally enable Vietnam to live up to its promise.

Following a decade-long privatisation process that can at best be described as full of fits and starts, Vietnam appears to have launched a divestment and anti-corruption drive that may finally enable the country to live up to its long vaunted promise and achieve the government’s cherished aim of MSCI emerging market status.

Investors had begun to give up hope the country would ever sell more than tiny stakes in its major state-owned firms until the government announced its intention to sell its entire stakes in Saigon Beer (Sabeco) and Hanoi Beer (Habeco) on September 1.

The two companies are among the most prized assets for foreign investors since they tap into growing consumer demand in a hot and humid country with a young population. Unsurprisingly, rumoured bidders include many of the world’s biggest brewers from Heineken, Asahi and Kirin to neighbouring Thai giants such as Singha and Thai Beverages.

The government says it will sell its remaining 89.59% stake in Sabeco in a deal, which has been valued around the $1.8 billion mark. According to S&P Capital IQ, the group’s remaining shareholders include two private equity firms: Aim Capital Management and Pacific Advantage Capital.

The credit rating agency also said Sabeco reported revenues of $1.22 billion in 2015, up 10.3% year-on-year and Ebitda of $197.2 million, equating to an Ebitda margin of 16.2%.

Where Habeco is concerned, Danish brewer Carlsberg already owns a 17% stake and may increase this further before both brewers are sold via public auction.

The government plans to use an auction process to try to ensure the process is transparent and also says it will list both companies on the Ho Chi Minh Stock Exchange.

Vietnam specialists believe the country’s renewed reform fervour is being driven by two key factors: economic pressure and the determination of the country’s most powerful man, Communist Party General Secretary Nguyen Phu Trong, who has pledged to improve investor confidence by rooting out corruption in a country beset by factional politics.

Earlier this year, Trong finally won a power struggle over the former prime minister, Nguyen Tan Dung, who stood down in April. Dung had always been viewed as the reformer and a number of foreign investors wondered whether the reform process would falter even further without him.

Outperforming expectations

Kevin Snowball, CEO of PXP Asset Management in Ho Chi Minh City, believes the new government has outperformed expectations. “People were concerned that Dung was the reformer, but the new government is showing it really understands what needs to be done to secure MSCI emerging market status,” he told FinanceAsia.

“For example, Sabeco and Habeco actually completed their IPOs in 2008 but they have never formally listed. Stock markets exist to provide valuations and the government appears to have grasped this concept,” he added. “It’s pushing the two brewers to list so it can maximise the money it raises from its divestment programme.”

Snowball is also optimistic more companies will follow Vinamilk’s lead and apply to remove the foreign ownership limit in permitted sectors. The stock has risen 30% since the end of June, with overseas investment jumping from between about 8% and 10% to closer to 20%.

“Companies were worried they’d open themselves up to foreign takeovers and have also been concerned about the tax implications if foreign ownership rises above 50%,” he said. “But they’ve seen how strongly Vinamilk has performed and this seems to have allayed a lot of fears.”

Snowball also noted that economic pressures were playing their part in speeding the government along.

For while Vietnam is one of Asia’s fast growing countries, that growth is slowing. Declining oil revenues are playing havoc with the government’s budget at a time of increased infrastructure spending.

At the end of the second quarter, GDP growth stood at 6.68% down from 5.5% in the first quarter. HSBC also forecasts the budget deficit will widen from 6.1% in 2015 to 6.6% at the end of 2016, far above the government’s 4.95% target.

Reforming the banking sector

Alongside consumer goods companies, foreign investors are also keen to invest in the banking sector. For the last few years, investors have been lobbying hard to persuade the government to scrap its 20% limit for a strategic stake and 30% overall cap (currently to no avail).

Earlier this week, CIMB announced it had been granted a banking licence to open up in the country and Moody’s put seven domestic banks on review for upgrade. Its sector ratings currently fall in the single-B category, while Standard & Poor’s tend to be a couple of notches higher at the double-B level.

The country’s highest rated banks are: Vietnam Technological and Commercial Joint Stock Bank (Techcom), which is part owned by HSBC and has a B2/BB- rating, plus Vietinbank also rated B2/BB-. Behind them are: Bank for Investment & Development (BIDV) with a B2/B+ rating and Vietcombank with a BB-/B+ rating.

At the end of August, Singapore sovereign wealth fund, GIC, demonstrated its rising confidence in the country when it announced it would pay almost $400 million for a 7.73% stake in Vietcombank, which also numbers Mizuho as a shareholder.

The sector’s growing roster of foreign shareholders may go some way to encouraging more faith in the soundness of the banking system, which has been rocked by a series of corruption scandals over the past few years. As such, investors will be looking closely to see what happens this Friday (September 9) when a judge delivers a verdict on one of the country’s largest ever corruption scandals.

Property tycoon Pham Cong Danh and three Vietnam Construction Bank employees are accused of stealing 18.68 trillion dong ($838 million) from the bank during his tenure as chairman between 2013 and 2014.

The case follows a series of high profile arrests including two other well known businessmen: Nguyen Duc Kien, founder of Asia Commercial Bank and Ha Van Tham, former chairman of Ocean Commercial Joint Stock Bank.

In 2013, Kien was jailed for 30 years for stealing 8.67 trillion dong from Asia Commercial Bank. Vietnam Construction Bank has now been taken over by the government alongside Ocean Commercial and Global Petroleum Bank, with suggestions they will be folded into Vietinbank, which will act as a consolidator for the state-owned sector.

Banking experts say two key trends will dominate the next few years: the overall number of banks must be reduced and capital must be replenished if the sector is to upgrade from Basel I to Basel II (scheduled for 2017).

Vietnam’s fragmented banking sector resembles a number of regional peers before the Asian Financial Crisis. First and foremost, it has far too many banks, although the government has been able to reduce the number slightly to 34 from 42 five years ago.

The issues, which bought Vietnam Commercial Bank to its knees, are also highly reminiscent of what happened in Indonesia during the mid 1990s when many tycoons had their own pet bank, which they used as a corporate cash cow.

As Snowball notes: “The problems in the banking sector have had a lot to do with poor credit decisions and high interest rates. But lending to yourself also played a big role and we’re optimistic the government will finally clean this up.”

Raising capital

Where capital is concerned, the most pressing issue lies in the state-owned sector. According to Credit Suisse research, overall capital averaged just 9.27% at the end of the first quarter and only marginally above the government’s 9% threshold.

The situation is slightly better in the private sector, which averaged 12.22% at the end of March.

The banking sector needs billions of dollars particularly if it is to continue funding loan growth the government forecasts will amount to about 18% to 20% this year. On the plus side, much of this growth is being directed towards the nascent consumer sector rather than state-owned monoliths.

Debt capital markets bankers are hoping some of the country’s higher rated banks will raise money offshore, where a scarcity premium and ratings momentum may play well with emerging market investors.

The only bank with an outstanding offshore transaction is Vietinbank. Its 8% 2017 bond now yields 3.7%.

Its reception also underscored just how much work Vietnam still faces to catch up with countries such as the Philippines and Indonesia, which traded at higher yields when Vietnam first accessed the international bond markets in 2005. Its B1/BB-/BB- rating, for example has also gone backwards over the past decade as far as Moody’s is concerned.

The Asian Financial Crisis forced Indonesia to radically prune its 240 banks and investors have long queried whether Vietnam will be able to follow suit when it is not under the same financial constraints.

If it can make meaningful reforms, private equity and bank investors have long salivated at the prospect of making the same outsized returns they did from the restructuring of the Indonesian, Korean and Chinese banking sectors during the noughties.